You are managing a portfolio of $1.7 million. Your target duration is 10 years, and you can choose from two bonds: a zero-coupon bond with maturity 6 years, and a perpetuity, each currently yielding 10%.
a. How much of each bond will you hold in your portfolio?
b. How will these fractions change next year if target duration is now 9 years?
The strategies for bond portfolio management are aimed at achieving a given objective on the basis of managing fixed income investments. This objective could be to maximize return on investment which is basically achieved by minimizing risk and managing interest rates.